Reichsbank

The Reichsbank was the central bank of Germany from 1876 until its dissolution in 1945. Think of it as the 19th and early 20th-century version of today's German Bundesbank or the U.S. Federal Reserve. Its primary job was to manage the country's currency and monetary system. While it had periods of stability, the Reichsbank is infamous in financial history for its catastrophic role in the hyperinflation of the Weimar Republic in the early 1920s. During this time, it printed money with such reckless abandon that the German currency, the Papiermark, became virtually worthless. Stories of people needing wheelbarrows full of cash just to buy a loaf of bread are no exaggeration. For investors, the story of the Reichsbank isn't just a dusty history lesson; it's a terrifying and essential case study on the dangers of out-of-control inflation, the destruction of savings, and what happens when a government treats its central bank like a personal piggy bank. It’s a stark reminder that the value of money itself can never be taken for granted.

The history of the Reichsbank can be seen as a four-act play, with the third act being a tragedy of epic proportions. Understanding this story provides timeless lessons about money and investing.

Born from the unification of Germany in the late 19th century, the Reichsbank initially operated under the classical Gold Standard. This meant that the German currency was backed by and convertible into a fixed amount of gold. This system provided discipline and stability, fostering confidence in the currency both at home and abroad. For several decades, the Reichsbank was a symbol of German economic strength.

The outbreak of World War I in 1914 changed everything. To finance the immense cost of the war, the German government suspended the Gold Standard. Instead of raising taxes significantly, it chose to borrow massive sums of money by issuing government bonds. The Reichsbank was then pressured to print money to buy these bonds, effectively creating money out of thin air to fund the war effort. This severed the link between the currency and a real, tangible asset, opening the door to the disaster that followed.

After the war, Germany was a broken nation, burdened with enormous debt and crippling war reparations demanded by the victorious Allies. With its industrial base shattered and unable to raise sufficient funds through taxes, the Weimar government saw only one way out: print more money. The Reichsbank's printing presses went into overdrive. This led to one of the most severe episodes of hyperinflation in history.

• The supply of money exploded, but the amount of goods and services in the economy did not. This is the classic recipe for currency debasement: too much money chasing too few goods.
• Prices spiraled out of control, eventually doubling every few days.
• Life savings held in cash or bonds were completely wiped out. A mortgage taken out to buy a mansion could be paid off with the money needed to buy a single cigarette.
• The social fabric frayed as the monetary system collapsed. This economic chaos is widely seen as a key factor in the political instability that allowed for the rise of the Nazi Party.

The hyperinflation was finally halted in late 1923 with a drastic currency reform that introduced the Rentenmark, a new currency backed by tangible assets and issued in strictly limited quantities. The Reichsbank was later brought under state control by the Nazis to secretly finance rearmament, before being officially dissolved after World War II.

The dramatic history of the Reichsbank offers powerful lessons that go to the heart of value investing.

Inflation is a silent tax that erodes the purchasing power of your savings. The Reichsbank's story is the ultimate example of this principle. As an investor, you must always think in terms of real return—that is, your investment gain after subtracting the rate of inflation. A 10% return on a stock is actually a 5% loss if inflation is running at 15%. Always ask: “Is my wealth growing faster than my currency is losing value?”

The Reichsbank became a tool of the government, forced to sacrifice long-term stability for short-term political needs. This highlights the importance of investing in economies with stable governance and independent central banks that are committed to a sound monetary policy. A country where the government can easily force the central bank to print money is a place where your investments are at constant risk of debasement.

This is the most crucial lesson for a value investor.

• Who was wiped out? People who held their wealth in the currency itself—cash, bank accounts, and bonds. These are financial claims on a currency that was becoming worthless.
• Who survived and even prospered? Those who owned tangible, productive assets. This included shares in real businesses (factories, retailers), farmland, real estate, and precious metals. These assets have intrinsic value independent of what a government declares a piece of paper is worth.

The Reichsbank's failure is a powerful endorsement of the philosophy of Benjamin Graham. It teaches us that true wealth lies not in holding paper currency, but in owning pieces of durable, well-run businesses that produce real goods and services. A share of stock is not just a fluctuating quote on a screen; it's your claim on a real asset that can protect you when the value of money itself comes into question.